THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

JOHN KING, HOST: I'm John King, and this is STATE OF THE UNION.

(BEGIN VIDEOTAPE)

KING (voice-over): President Obama resets his agenda.

OBAMA: Jobs must be our number one focus in 2010.

KING: Can he and his party regain the initiative, or will Republicans thrive in the election year policy battles? In two exclusive interviews, we will talk to the White House press secretary, Robert Gibbs; and we'll go inside the GOP strategy with the Senate's top Republican, Mitch McConnell.

And our "American Dispatch" from Michigan. The state has led the nation in unemployment for 43 months, the tough economy is one reason Republicans are confident of a mid-term rebound.

This is STATE OF THE UNION report for Sunday, January 31st.

(END VIDEOTAPE)

KING: We will spend much of this Sunday exploring whether this new talk of bipartisanship from the president and from his Republican opposition will blossom into true partnership or turn out to be just more political posturing.

The answer matters because there are so many big decisions looming. The president is about to send Congress a new budget. He is asking for a swift action on the jobs bill, and is looking for a plan B now that his plan to put 9/11 terror suspects on trial in New York City appears to be collapsing.

In a moment, an exclusive conversation with the Senate's top Republican, a man who has even more leverage now in the wake of the GOP's Massachusetts special election upset. But first, the White House view. Robert Gibbs is the White House press secretary, welcome.

And before that, a man with deep experience on Capitol Hill, before we get to questions of Mr. Gibbs, a quick but important piece of housekeeping. This will be my last Sunday in this chair. In just a few weeks, I will ship to a new role anchoring Monday through Friday evenings. And at the end of this hour, a bit more on that. And I have the privilege of introducing to you the remarkable journalist who will be with you next Sunday and beyond on STATE OF THE UNION. KING: Now to Mr. Gibbs. Sorry you did not get the job.

GIBBS: I didn't necessarily want it, but we should say congratulations to your tenure, and good luck in the future.

KING: Thank you. Thank you. It has been a great treat. I'll talk more about that. But let's talk about the president's agenda...

GIBBS: You don't know anything about the fact that I need a new job, do you?

(LAUGHTER)

KING: No, I don't.

GIBBS: OK.

KING: I don't.

The president has a huge agenda before him. And in the State of the Union, he said first, second, and third should be jobs, jobs, and jobs. How much will a new jobs bill cost? And how many jobs will it create?

GIBBS: Well, what the president outlined Friday in Baltimore at a small business was a tax credit that will encourage small businesses to hire by providing them money to pay payroll taxes next year -- or, I am sorry, this year.

We want to add infrastructure spending, which we know will create jobs. And another part of the president's plan is to take money that the banks have paid back -- the big banks paid back through TARP, and lend that money through community banks again to small businesses.

We know that small businesses are the engine that drive our economy. And this is the place that will create jobs. We wanted to create an atmosphere that allows those to begin to hire. This bill will go -- parts of this have gone through the House in December. The president hopes that the next order of business that the Senate will take up is this package. And we will see how much...

KING: Do you have a rough overall price tag for a jobs bill?

GIBBS: You know, I think probably somewhere in the $100 billion range.

But, John, I think what is important is, we know two things about the state of our union, if you will. One is that jobs are on the mind of virtually every American, and two, that they want Democrats and Republicans to work together.

I can think of no better message to send the American people at the beginning of this year and at the beginning of this decade, the Democrats and Republicans will put aside their differences and work together to pass a tax credit for small businesses, to increase lending for small businesses, to increase our investment in infrastructure and create more jobs.

I think that would be a powerful message to send to the American people. I hope that the Republicans will meet the president halfway.

KING: Well, we will ask Senator McConnell when he is here in just a few minutes.

And let me ask you a couple of more details. So there is already over about $500 billion left to be spent in stimulus money. You say you need additional spending on infrastructure?

GIBBS: I don't know if it's quite that amount of money that's left to be spent. I know that the Recovery Act, and we saw it in the economic figures that were released Friday, with 5.7 percent economic growth in the previous quarter, we have now had two straight quarters of economic growth that had been preceded by four consecutive quarters where the economy had retracted.

Economic growth will eventually lead to job growth, and that's what we always wanted to see through the Recovery Act. But obviously, we are not creating the jobs that we would like to, and I think that some additional recovery and stimulus spending is important in order to, again, create an environment where small businesses and large, alike, can hire more workers.

KING: On the point of creating jobs, you say not as fast as you would like. Your critics dispute your numbers. But let's use the administration's numbers for a minute. You said the stimulus bill, the Recovery Act, would create or save about 3.5 million jobs last year and now into this year. By the administration's numbers, you have about 1.5 million jobs left.

If the stimulus, by your projection, will meet those goals, what would a jobs bill add? How many more jobs?

GIBBS: I don't have an estimate with me on how many those would add, but we know this, John, that whatever those recovery acts were going to save or create, it would not completely fill the hole that we saw this economy bring, which was more than 7 million people that were out of work.

But, you know, I know there are critics that want to say they don't agree with our numbers. The Congressional Budget Office, which is the scorekeeper for legislation that has to go through Congress, agreed with our numbers.

So -- but I know this, John, again, we have got a tremendous hole. We did not get here overnight. We were losing jobs for two years. We had been losing jobs for two years. We have a tremendous hole that we have to fill in. This is not going to do it all. But this is an important first step in filling that hole.

KING: Many people in this town, and many people around the country wonder, where does health care end up in this equation as the president puts jobs at the forefront of his agenda? I know from our Ed Henry, you guys had a meeting Friday afternoon at the White House to talk about next steps when it comes to health care.

I want to talk about that. But first, I want to remind you of something your friend, David Axelrod, the senior adviser to the president, said here five weeks ago.

(BEGIN VIDEO CLIP)

DAVID AXELROD, SENIOR WHITE HOUSE ADVISER: We are way deep in the red zone, and we are right on the one-yard line.

(END VIDEO CLIP)

KING: "Right on the one-yard line." That was five weeks ago before the Massachusetts special election. The Pro Bowl is today. The Super Bowl is next week. To continue the football metaphor, when turnovers in the playoffs cost you, you have turned the ball over a little bit here, if you were on the one yard line five weeks ago, where are you now and what next?

GIBBS: We are still inside the five-yard line.

KING: You really believe that?

GIBBS: Absolutely. We're one vote away in the House of Representatives from making health care a reality -- health care reform a reality.

Look, the problem has not changed, right?

KING: The Senate, you mean, you said the House, you mean the Senate.

GIBBS: Well, no. The Senate -- well, the House and the Senate have passed the bill. If the House were to take up the Senate bill, that bill would then go to the president's desk.

But understand this, the problem that millions of families struggle with, the high cost of health care, small businesses that cannot offer the same benefit package that they could only a few years ago because of the skyrocketing costs, families fighting with insurance companies to cover their children as these insurance companies say, these kids have preexisting conditions, those problems existed for many years, they existed before the Massachusetts election and even after the Massachusetts election.

You know, if you look at some of the polling that has come out of what drove people's decision in the Massachusetts election, 70 percent of those interviewed said that they hoped Scott Brown, the new senator-elect, would go to Washington and be able to work with Democrats to make health care reform a reality. Only 28 percent wanted him to come to Washington, stop everything.

Again -- I think once again the American people are far ahead of where Washington is. I think we can get something done for the American people if we sit down and listen to each other, if we share ideas and we work together on the priorities of the American people. KING: Well, Scott Brown says he is willing to work with you, he just doesn't like the existing two bills, the House and the Senate version. The president had this fascinating session on Friday with House Republicans up in Baltimore. I was in the back of the room and had never seen anything like it.

The president of the United States on national television, a little give (INAUDIBLE). It was like "Question Time" in the British Parliament. One of the things he said was quite interesting. He was talking about how he and the Republicans disagree on several big issues when it comes to sweeping legislation.

So the president suggested maybe there is another way.

(BEGIN VIDEO CLIP)

OBAMA: My hope would be that we can look at some of the these component parts of what we are doing and maybe we break some of them up on different policy issues.

(END VIDEO CLIP)

KING: Is that a signal on health care? Would the president like Speaker Pelosi to try to pass the Senate bill, which would be controversial but would get the president the big bill, or does the president think, let's test the Republicans, if they said they would actually work with us, let's break up health care and have several votes on several different proposals?

GIBBS: Well, look, John, I don't think we know yet the answer on a process of this, but we do know this, that the American people want to see that process take place. I think what you saw yesterday -- or Friday, the give and take in the open, where people can evaluate the questions and the answers that each side is giving.

And look, I think that, you know, the president talked about the Recovery Act. The Recovery Act is comprised of about $300 billion in tax cuts. Tax cuts that almost -- in almost every single instance, Republicans in Congress are for or would have voted for if it were not for being proposed by a Democratic president.

I think one of the messages that he had was, we may not agree on every single thing, every single word in a piece of legislation, but you can find things that are important for you and make sense for you. There are things that are important for me and make sense for me.

That's what legislating and governing is all about.

GIBBS: Understanding that we may not agree on 100 percent, but lord knows that was never the test in this town until very recently, that everybody had to agree on every single word to get bipartisan support for this.

I think that's what the American people want most of all. The president is ready, willing and able to sit down and listen to Republican ideas for how to improve the health care bill, substantive ideas that meet the goals that we know the American people have of cutting costs, of insuring those that don't have health care coverage right now. And more importantly, reigning in some of the insurance costs.

You know, Governor McDonnell in his response said a Republican idea would be to allow insurance companies to sell insurance across state lines, and as you heard the president say on Friday, we thought that idea was such a good one, it's in the packages that passed the House and the Senate.

KING: Let's continue on that point because if the tone is going to change, everybody, including the president is going to have to be involved in the effort. And for the past year when it comes to the health care debate, the White House message, the Democratic National Committee message, the Democrats in Congress message has been the Republicans vote no and have no ideas. This includes, going back to April, this is Robert Gibbs at a White House briefing.

(BEGIN VIDEO CLIP)

GIBBS: I think you heard me and others say that you can't just be the party of no or the party of no new ideas.

(END VIDEO CLIP)

KING: That was the White House press secretary in April. Then the president at a Labor Day rally in Cincinnati.

(BEGIN VIDEO CLIP)

OBAMA: I've got a question for all those folks. What are you going to do? What is your answer? What is your solution? And you know what? They don't have one. Their answer is to do nothing. Their answer is to do nothing.

(END VIDEO CLIP) KING: Then at this remarkable session on Friday, the president said yes, the Republicans actually do have ideas, he just doesn't like them.

(BEGIN VIDEO CLIP)

OBAMA: Actually, I have gotten many of your ideas. I've taken a look at them, even before I was handed this. Some of the ideas we have embraced and are in our package. Some of them are embraced with caveats.

(END VIDEO CLIP)

KING: Selling across state lines was one of those that was embraced with a caveat. Can we just say from this point forward that you might say the Republicans are the party of bad ideas in your view, but you won't use the no ideas anymore? It was quite remarkable, on issues from deficit reduction to health care and beyond, the president did, while he said, "I don't like the way you do this. I don't agree with the way you do it. I don't have the economist to say you're right on this." But after a year of no ideas, no ideas, no ideas, the president was putting clear in saying you have a lot of ideas, I just don't accept most of them.

GIBBS: But John, I think the point is, are you going to come into the arena and use what your ideas are and try to make a piece of legislation better so that we can move this process forward for the American people? Understand that somebody stood up there and said that they had an idea that would cover 30 million people that lacked health insurance and it would not cost anything. Well, I doubt that's probably the case, John.

Let's take a good example of what happened in the Senate this week. Republicans and Democrats have called for a commission to analyze our debt and our budget for years, right? Seven Republicans, John, in December of 2009, just several weeks ago, co-sponsored a bipartisan bill by Judd Gregg, a Republican from New Hampshire, Kent Conrad, a Democrat from North Dakota. Then when the bill -- the bill came up for a vote this past week, it failed.

KING: You can be sure we will ask Senator McConnell about that. He will be here shortly.

GIBBS: But understand this. It failed by seven votes, seven co- sponsors from four weeks ago decided it wasn't worth voting for now. And the question is, is this playing political games? Or if it's not, then what is it?

Because if it was an idea that you liked four weeks ago, but you are voting against it because it actually could become law, are you doing it because you just want to obstruct what this president is trying to do and what the American people want to do? I think the Republicans owe an explanation on that vote and others about whether or not we are just playing games up here in Washington or are we trying to address problems. John, I think the best proof for the American people would be to get a jobs bill through the House and the Senate, get it to the president's desk immediately and do it with bipartisan support.

KING: Let me ask you lastly on this Sunday morning, tell the American people what is going to happen to Khalid Sheikh Mohammed and the other alleged 9/11 terror plotters. The plan was to put them on trial in New York. The mayor of New York says he can't afford it, worries about the security issues. As you know, Republicans and a growing number of Democrats in Congress say number one, we don't want them on American soil, and a lot of those lawmakers also say number two, this should be done in the military justice system, not in the federal court system. What is plan B, if you need one?

GIBBS: Well, let me tell you what plan A is for Khalid Sheikh Mohammed. Khalid Sheikh Mohammed is going to meet justice and he's going to meet his maker.

KING: In a federal court or in a military court?

GIBBS: He will be brought to justice and he's likely to be executed for the heinous crimes that he committed in killing and masterminding the killing of 3,000 Americans. That you can be sure of. KING: But will it be in a federal courtroom or is there a possibility the administration will backtrack on that one?

GIBBS: Well, the attorney general believes that the best place to do this is in an American courtroom. And quite frankly, I hate to go back to the game playing on this, that's what a lot of people believed. Richard Reid who tried to blow up an airliner, a story not dissimilar to what we've seen. Again, a plot mastermind by Khalid Sheikh Mohammed was tried in Boston, Massachusetts. Zacarias Moussaoui, the 20th hijacker, was tried about 10 miles from here. Testifying at that hearing, Rudy Giuliani, who raised it up as the hallmark of the American justice system.

I hope you will ask Mitch McConnell and others why trying those terrorists in our courts during the Bush administration was fine. We never heard anybody object to that.

KING: I promise I will ask him. Let me try one more time. No way in New York City, and are you sure it will be in a federal courtroom, or is there a possibility because of this controversy, it may go back to the military venue?

GIBBS: I would say this, John. We are talking with the authorities in New York. We understand their logistical concerns and their security concerns that are involved. We have been discussing that with them.

As you know, they were originally supportive of this. We want to see this man tried and brought to justice in the place in which the crime was committed. We will work with them and come to a solution that we think we bring about justice for those that lost loved ones on such a horrific day on 9/11. And I think again, Khalid Sheikh Mohammed, will be executed for the crimes that he committed.

KING: One last quick one before I let you go. During the presidential campaign, candidate Barack Obama said and then President Obama in the early days said if he were elected, he knew there was a big federal budget deficit and he would do this.

(BEGIN VIDEO CLIP)

OBAMA: Today, I'm pledging to cut the deficit we inherited by half by the end of my first term in office.

(END VIDEO CLIP)

KING: There are many who now say because of the recession and because of the stimulus spending that will be an impossible goal to keep. Will the president keep that goal or is that one going to have to go by the wayside?

GIBBS: The president is committed to keeping that goal understanding that as you said, this recession was deeper than we thought it was going to be, both sides of the aisle thought it would be. The president will outline some steps tomorrow, including freezing nondiscretionary spending -- spending that since 1995 has almost doubled in our federal budget. And again, I think this would be a great signal to send to the American people that we are going to take programs that don't work, or are duplicative in our government and once and for all, eliminate them. Let's make some serious cuts like we did last year, put ourselves back on the path toward fiscal responsibility. But again, we can do this together. I think Republicans and Democrats can work on these issues.

KING: We thank you for coming in on my last Sunday here. I will see you on weeknights, I bet. And up next, the Republican view, Senate Majority Leader Mitch McConnell is here for an exclusive conversation. Please stay with us. Thank you.

GIBBS: Thank you. Good luck, again.

KING: Off we go.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

OBAMA: And if the Republican leadership is going to insist that 60 votes in the Senate are required to do any business at all in this town, a super-majority, then the responsibility to govern is now yours as well.

(APPLAUSE)

Just saying no to everything may be good short-term politics, but it's not leadership.

(END VIDEO CLIP)

KING: The president didn't name names there, but that State of the Union message -- some called it a lecture -- was aimed at our next guest, the Senate's top Republican, Mitch McConnell of Kentucky.

Senator, welcome.

MCCONNELL: Glad to be here, John.

KING: To that point, the president essentially called you out in the State of the Union address, saying, if you have 41 votes, as you will have in just a few short weeks, in the United States Senate, you have a responsibility to join him in governing.

So let's go through some of the issues. You just heard the press secretary, Robert Gibbs, talking about the jobs bill. He thinks that, after a year of pretty hyper-partisanship, that might be a place where Democrats and Republicans can sit down and write a bill.

Do you share that optimism?

MCCONNELL: Well, look, as long as it creates jobs, we're willing to take a look at it. And we were responsible for governing before we got 41 votes. We didn't come here just to do nothing. The president, however, the charts the course. And unfortunately, he chose to go really hard left, and it made it very difficult for him to build any kind of bipartisan consensus in the Senate or the House. And it's silly talk about having no ideas. I mean, we've heard that ad nauseum for over a year. He knows that's not true. He admitted it at the House Republican meeting on Friday. KING: So when it comes to a jobs bill, you heard Robert Gibbs talk about tax cuts, tax credits. Was the shape of what he described to your liking or would you need to go knock on the White House door and say, no, we need to do this?

MCCONNELL: Well, we're certainly...

KING: About 100 -- is that the right price tag?

MCCONNELL: Well, we're willing to take a look at it. It hasn't officially come out yet, so it's, kind of, hard to prejudge it, but we're looking at something to create jobs.

I mean, so far this administration has done best -- what it's done best is spend, borrow and tax, and the unemployment's gone up.

We all have a responsibility to seriously grapple with the question of how do you get jobs created again?

And two things that we know would help -- businesses aren't hiring now in part because they're looking at health care taxes, if this health care bill passes. And one big step would be to put this health care bill on the shelf. The NPR poll last week...

KING: Put it on the shelf? Not this year?

MCCONNELL: Put it on the shelf, go back and start over. That would be a great relief to American business looking at health care taxes. We know the public is overwhelmingly against the bill. In the NPR poll last week, 20-point difference. Twenty percent more oppose the bill than support it.

Put the health care bill on the shelf; indicate that you're not going to allow all of the tax relief that is supposed to expire at the end of this calendar year to expire. That's not a reassuring message.

KING: As to the Bush tax cuts expire, there is not a -- you don't see a chance or a prayer that the Democratic president who campaigned on any of the Bush taxes -- he's not going to keep those in place?

MCCONNELL: I think he probably isn't, which mean, if you're a business now and you're trying to figure out what the future is; you're looking at health care taxes; you're looking at capital gain taxes going up, dividend taxes going up; if you're a small business and pay taxes as an individual taxpayer, your taxes are going up.

So is that a great environment in which to expand employment? I think the answer is no. I hope this productivity figure that we saw in the fourth quarter is the precursor of things to come. What it could be, however, is that businesses are getting more productivity out of the same number of employees because they are fearful of the tax increases that are coming this year.

KING: Well, let's talk about your side of the equation. Robert Gibbs just complained about it and the president mentioned it in his Saturday radio address.

He says there was a proposal. It was sponsored by one Democrat and one Republican. It would create a commission that would spend a few months studying how can we cut federal spending, maybe even propose tax increases; find some way to reduce the federal budget deficit.

Now, it then failed last week on a vote in the Senate. And here's the president's complaint.

(BEGIN VIDEO CLIP)

OBAMA: This past week, 53 Democrats and Republicans voted for this commission in the Senate, but it failed when seven Republicans who had cosponsored this idea in the first place suddenly decided to vote against it.

(END VIDEO CLIP)

KING: Now, we want to show on our screen the seven Republicans who were cosponsors but then withdrew their cosponsorship and voted against it: the Republican Sam Brownback of Kansas, Mike Crapo of Idaho, John Ensign of Nevada, Kay Bailey Hutchison of Texas, James Inhofe of Oklahoma, John McCain of Arizona, Robert Bennett of Utah.

If this was such a good idea that they would cosponsor it -- this is what comes up, Senator McConnell, in my travels all the time. People say, why do they always just play politics in Washington? Is this just politics, as the president says, or if it was the same proposal six months ago when they cosponsored it, what was wrong with it last week when a Democratic president wanted it?

MCCONNELL: Well, what was wrong with it last year? I mean, I discussed this very issue with the president right after he came to office, and with his chief of staff, never could get a commitment out of him.

In the meantime, we've seen a year, now, in which we've been on a spending binge. They passed a budget that doubled the national debt in five years and tripled it in 10. There's a lot of skepticism now about whether -- and the president endorses this commission a couple of days before the vote. Where was he a year ago when we were talking to him about it?

KING: But why should that...

(CROSSTALK)

KING: Why should that matter? Why should that matter?

(CROSSTALK)

KING: Because I want to go back to your point. I'm sorry for interrupting. I want to go back to your point.

Why should that matter? Yes, the president endorsed it because of political pressure, without a doubt. Democratic senators went to the White House and said, we will not vote to increase the debt ceiling unless you help us out here.

But if it was a good idea, why should -- let's say the president's playing politics. But if it's a good idea, why not vote for it?

Because you were here several months ago and you said it was a great idea.

(BEGIN VIDEO CLIP)

MCCONNELL: The Gregg-Conrad proposal would basically set up a base -- a closing-type approach, where you appoint of commission that would come up with a solution, come to the Congress with an up or down vote, which would guarantee a result. That's something we can have a bipartisan approach on. I'm in favor of that kind of a move to give us the ability to tackle one of our long-term deficit problems.

(END VIDEO CLIP)

KING: And yet, you voted...

(CROSSTALK)

KING: And yet you voted no.

MCCONNELL: Well, let me tell you an even -- the Conrad-Gregg commission was not the only commission proposed the other day. We also had a spending reduction commission, the same kind of mechanism, but targeted at getting spending down.

The American people are appalled by the amount of money we have been spending this year. And I think a more targeted way to do the same kind of commission approach was with the Brownback proposal that we all voted -- many of us voted on last week. I just think that's a better way to go.

I still like the commission idea...

KING: A better way for Republicans in an election year because it would take some tax increases off the table?

MCCONNELL: Democrats -- Democrats, as well. Look, nobody thinks raising taxes in the middle of a recession is a good idea. Have you ever heard anybody say that? I don't think so.

We're in the middle of a recession. We've got 10 percent unemployment. This commission would have made it possible to raise taxes, if you target the spending problem. Look, I don't think anybody in the country thinks we have a problem because we tax too little. I think the problem is we spend too much. So I like the commission idea, just as I said a few months ago. I think a better way to do it is to target spending, a spending reduction commission. KING: Quick break, and we'll be back with the Senate Republican leader, Mitch McConnell. We'll discuss his view of whether the terror trial should be held in New York City or whether those terror suspects should be put on trial in the military justice system. Stay with us.

(COMMERCIAL BREAK)

KING: We're back with the Republican leader in the United States Senate, Mitch McConnell of Kentucky.

You heard the White House press secretary, Robert Gibbs, say a few moments ago that he believes Khalid Sheikh Mohammed will be executed. He will meet his maker, he said. But there is a big debate about where this trial will take place and what form this trial will take.

Mr. Gibbs would not commit. The plan is to try him in a federal court system in New York City at the moment. They are looking for another venue, I was trying to get him to say, will it be in a federal courthouse, and he never firmly said yes.

Where do you think this will take place?

MCCONNELL: The only time this administration ever cites the previous administration for a precedent is to mention that there was some terrorists tried in U.S. courts. We now know that was a mistake. That was a mistake by the previous administration.

The other mistake they made that shouldn't be replicated by this administration is letting too many people go from Guantanamo. What should we do? Three years ago we passed a military commissions legislation for the specific purpose of trying foreigners captured on the battlefield.

They ought to be tried in these military commissions. They also ought to be detained at Guantanamo. I think, John, any community in America is going to object in the same way that New York finally did to these people being put on trial in the United States in civilian courts.

KING: If you ask the White House about this, it highlights -- they say it's not just the president, it's not just Attorney General Holder, that General David Petraeus says he believes a public trial at a federal courthouse is the best way to do it so that it's not an al Qaeda recruiting tool.

That Secretary Gates, a holdover from the Bush administration at the Defense Department, also they believes a trial in the federal court system is preferable to a closed trial in the military commission. And that the CIA operatives leading the fight against these guys in Yemen, in Somalia, in Afghanistan and elsewhere, also believe that if you did it in a closed setting in a military commission it would be a powerful recruiting tool.

If General Petraeus, Secretary Gates, and the intelligence leaders say, do it in court, why do you say that's a bad idea?

MCCONNELL: I simply disagree and so do the American people.

Look, Guantanamo is -- it was not there before they started attacking us in the '90s, before they attacked us on 9/11. Osama bin Laden did not mention Guantanamo in his last video. What we need to do is deny these people a show trial. We need to proceed to interrogate them, which you couldn't do obviously with the Christmas bomber.

I mean, Larry King would have a more thorough interrogation of one of his witnesses than the Christmas bomber had by the Justice Department. This is really dangerous nonsense. We have a way to do it, John. Interrogate them, detain them, and try them in military commissions offshore at Guantanamo from which no one has ever escaped.

The American people think that's the best way to do it. Most of the legal experts that we talk to think it's the best way to do it.

KING: And if the administration continues to say, bring them somewhere in the United States, and put them on trial in a federal courthouse, your power to stop them would be to deny the funding. Would you stand up and say, Mr. President, I'm sorry, bad idea, you are not getting the money?

MCCONNELL: Yes, absolutely. And I think that will be done on a bipartisan basis. And the sooner the administration figures out that whatever domestic support they had for this is totally collapsing.

KING: Let me ask you, lastly, your newest member, Scott Brown, will join you in about 11 days. I believe he things he will be sworn in around the 11th. He gave an interview this morning on ABC in which he described himself as a big tent Republican, open to a lot of ideas.

You know he is going on the ballot in two years in my home state of Massachusetts where you have to be perhaps a little less conservative than a senator from Kentucky, or a senator from South Carolina. How is that going to work out in your caucus?

And when you met with him, did he tell you, Senator, I'm with you on the taxes, I'm with you on spending, but on this issue or that issue, I'm going to have to work with the president?

MCCONNELL: Yes. I mean, he emphasized to me exactly what he said publicly. He is going to be an independent voice for Massachusetts. We expect that. You know, Republicans from the Northeast are not exactly like Republicans from the South or the West. We understand that.

We have a big tent party. And we're thrilled to have him. And I know that he will be an aggressive advocate for the people of Massachusetts, and support us - the rest of us, when he thinks it's appropriate. KING: It's an interesting year. Senator Mitch McConnell, the Senate Republican leader, always been a friend of this program, i thank you for that. I hope you will be in the days ahead. And maybe you will see me on the night time as well.

Up next, we get a candid assessment of the political climate from an outspoken Democrat.

(BEGIN VIDEO CLIP)

KING: You're finishing up your term, but would you want to be a Democrat on the ballot this year?

GOV. JENNIFER GRANHOLM (D), MICHIGAN: No, no. Personally, no.

(END VIDEO CLIP)

KING: We will talk to the Michigan Governor Jennifer Granholm about her state's high unemployment rate and what she wants President Obama to do about it.

(COMMERCIAL BREAK)

KING: If you had to pick one state to study the toll of this recession, Michigan would lead the list. It has the highest unemployment rate in the nation, household incomes have dropped substantially over the past decade. And manufacturing jobs, tens of thousands of manufacturing jobs have vanished.

It was one of our early stops when we began our "State of the Union" travels.

KING: And we stopped back this week, including a visit with the Democratic Governor Jennifer Granholm.

(BEGIN VIDEOTAPE)

KING: What is it like being governor of a state that for 43 months, 43 months, has led the nation in unemployment?

GRANHOLM: Obviously it's enormously challenging. And it's -- the people are feeling it so deeply and there is anger across the country. Here there is anger that has lasted for longer, and people are at the point where it's not just anger, but it's now OK, we have got to do something about this. You know, we are the poster child of the global shift in manufacturing jobs.

KING: And in the context of that, the president now says a whole lot of other things we want to do, but first and foremost, we need to do a jobs bill. Put everything aside, let's do a jobs bill. As someone who has been in the middle of the storm, what needs to be in it for it to work, work in the short term?

GRANHOLM: I know he talked about tax cuts and all of that, but frankly for us, I think the most important thing that was said, the thing that was out of my seat was that he would provide tax credits for those who manufacture in this country and take them away from those who are off shoring. He said he would enforce trade agreements to ensure that we have a level playing field, that he would have an export initiative. That tells me, that tells us here that that means we're going to be making stuff in this country.

KING: Is it overdue?

GRANHOLM: Is it overdue? Are you kidding me? It's overdue like a million jobs in Michigan overdue. You bet it's overdue. It should have been -- we shouldn't be in a position where we are giving away the store to other countries. We are allowing them to beat the pants off of us in this trade war. We don't even enforce the darn agreements we have and then we enter into ones that give advantages to the other side. What the heck is that? It's just crazy to me.

KING: He is a somewhat weaker president delivering the message now than had that been at the top of the speech a year ago instead of health care. Should it have been? Should it have been health care, yes, but jobs instead a year ago?

GRANHOLM: John, I've learned in this job that things happen, things transform so much over the course of a year that it's so easy to be Monday morning quarterbacking. I do know that I am grateful he has taken it on now. Health care is a jobs issue, but obviously focusing more directly on the word jobs and on specifically creating the environment for jobs is something that is very welcome.

KING: The president of the United States is now learning after a year in office that campaigning is one thing and governing is another. When you're president or governor for awhile, when you're in charge, you start to get the blame.

GRANHOLM: You know, we have this sort of myth that the leader, the super leader with the cape comes in with the wand and fixes all the problems, and understandably people who are hurting want quick results. So you are up against those -- that level of expectation and frustration. But you have to understand that it comes with the territory. You have to have thick skin and you have to continue to push the boulder. You have to continue to keep at it and not pay attention, not be focused just on polls.

KING: Does Washington look any different to you? The fundamental promise, whether you're talking -- forget the economy, health care, Iraq, Afghanistan. The biggest thing candidate Obama promised was we're going to be grown-ups, I'm going to reach across the aisle, the poisoned partisanship is going to be gone. A year in, does Washington look any different than it did under a President Clinton or a President Bush?

GRANHOLM: From a partisan perspective, I think it has become more difficult to govern, but I don't think it's his fault. I just think the circumstances in the country have become more partisan.

But I can tell you from a governor's perspective, it has been night and day, the difference between the prior administration and the Obama administration for us in the fact that we were able to get the largest number of advanced battery grants because we have an administration who cares about investment in advanced technology for electric vehicles. That means jobs for us. Totally different ball game.

We were able to get investment in Michigan for tearing down blinded homes for example in some of these -- in our urban centers where people have moved out. We would never have gotten that under the Bush administration. Virtually all of his policies tracked what we are trying to do here. So it is night and day from my perspective sitting in this chair, and I am very grateful for that difference.

KING: You are finishing up your term. Would you want to be a Democrat on the ballot this year?

GRANHOLM: No, no. Personally, no, I am glad I am not on the ballot at all. I wouldn't want to be an incumbent on the ballot. You know again, I know that Democrats are taking more of the heat on this, but honestly, I think it's incumbents that are really the endangered species, or at least about to become more endangered. Anybody who is in office will suffer the wrath of the voter because they want it fixed and they haven't seen it fixed, so let's try somebody new. KING: When you travel, especially in places like this, where people have 10 or 15 percent unemployment, their mayor has cut services, their school district has cut services, their governor is cutting services, maybe raising taxes, they are sitting around and saying, can't pay for college, have to cancel the family vacation and they look at Washington, and Washington doesn't seem to be cutting back anywhere. Is that part of the disconnect of the president's problem right now?

GRANHOLM: It's huge and important I think when the president said he was going to freeze spending, that's an important step. Cutting spending is even more important. Triage everything to provide the basics to people so you're protecting them. But all this other stuff, forget it. Put money where you have to. Cut everything else and that I think is what people want to see. KING: Governor, thank you.

GRANHOLM: You bet. Thanks, John.

(END VIDEOTAPE)

KING: See Jennifer Granholm there, she gives her final state of the state address on Wednesday night. Here on the front page of the "Lansing State Journal," Republicans praising some of it, not liking other parts of it. She has had a tough eight years in office. And next, we will head just south of Lansing for an early peek at the country's changing political terrain. A House district carried by President Obama and the Democrats in 2008, well it's a top Republican target this year. (COMMERCIAL BREAK)

KING: As you think about the midterm elections this year and the map, find a House seat where a Democrat won by 5 points or less in 2008, you're more than likely to find a House seat being targeted by Republicans in the midterm election year they believe at the moment is trending their way. We visited just such a place in our travel this week.

KING: Michigan's 7th Congressional District, it's down here south of Lansing. It has a little over 600,000 registered voters. And for 16 years, until 2009, it had been held by a Republican. But the Democrat, Mark Schauer, won 49 percent to 46 percent over Tim Walberg two years ago. But remember, that's a presidential year, when turnout depends to be up.

So in our "American Dispatch" this week, we visited the small towns and the snowy farmlands of southern Michigan for an early taste of the midterm election mood.

(BEGIN VIDEOTAPE)

REP. NANCY PELOSI (D-CA), SPEAKER OF THE HOUSE: The president of the United States.

(CHEERING AND APPLAUSE)

OBAMA: Thank you.

KING (voice-over): On State of the Union night, a reunion of the grassroots army that helped President Obama to his sweeping 2008 victory. Still fans without question, but not fans without doubts.

HARRY MOORE, OBAMA SUPPORTER: He says wonderful things, but he has got to follow it up. He has got to be someone that we can believe what he says instead of listening to what he says and say, boy, I hope that happens.

SUSIE MOORE, OBAMA SUPPORTER: And I think he just thought that he would be a consensus-builder. And that turned out to be a very naive -- I mean, very applaudable, but naive approach.

KING: This is the Charlotte, Michigan, home of Harry and Susie Moore who twice held house parties during the 2008 campaign, who are trying to rev up grassroots excitement and involvement for this year's midterm elections.

(on camera): If 2008 was a 10, everybody was plugged in and fired up, where are we now?

H. MOORE: We've stepped way back from what we did then. It's probably a seven.

S. MOORE: I was going to say the same thing, a seven. And we're going to have to work to make people ramp it up higher so that people stay involved.

KING (voice-over): Charlotte is in Michigan's 7th Congressional District.

KING: Tim Tarry is a chiropractor and the Eaton County Republican chairman. Twice he helped George W. Bush carry the 7th District, then came the Obama wave of 2008. TARRY: When the tsunami came across, you know, it's time to start swimming, guys. OK? And we weren't swimming fast enough. And we just got flooded.

KING: But Tarry says 80 people turned out for a local GOP meeting last week. Proof to him the tide is turning.

TARRY: I think we totally have the intensity. In all my involvement since 1974, I never remember just the general public calling, what can I do to help? I want to help. We need to get this district back in the hands of Republicans because Mark Schauer has just become kind of a puppet of the White House.

KING: Schauer is a freshman Democrat who won by just 2 points.

REP. MARK SCHAUER (D), MICHIGAN: Any candidate or any member of Congress in a tough district needs to show that they're in touch on the jobs issue.

KING: The congressman comes home every weekend to highlight efforts to help local companies. But as much as he tries to be his own man, he acknowledges a rebound in the president's political standing would help and applauds the State of the Union focus on jobs.

SCHAUER: It's very important to show that, you know, he's still committed to the change he campaigned on and to turn our economy around.

KING: The turn-around is striking. Just 15 months after he rode the Obama coattails to Congress, Schauer says this cycle, while early, feels very different.

SCHAUER: You know, we've got to get the base back. Democrats have to worry about their base being motivated to vote.

(END VIDEOTAPE)

KING: One of many fascinating races we'll keep an eye on this year. And if you want to learn more about our travels over the past year, go to cnn.com/stateoftheunion, when you can read and watch reports from all 50 states. When we come back, a special introduction, the new anchor of STATE OF THE UNION.

(COMMERCIAL BREAK) KING: Sunday mornings are special, a time for family and faith, and for many, a time to dig deep into the Sunday paper and reflect with loved ones on the issues shaping our lives. To be invited to share those mornings with you this past year has been a remarkable gift, and a learning experience for which I am forever grateful.

I will miss it. But as I move on to a new challenge, I could not be more proud or more excited about the future of this program. We'd like to say here at CNN that we have the best political team on television. We say it because we believe it. And as they say in sports, there is no I in team, but great teams have great leaders. And in that regard, our senior political correspondent is without peer. An experienced, dogged reporter, a poetic writer, a gifted leader and mentor. And beginning next Sunday, Candy Crowley will have the privilege and the pleasure of leading our Sunday conversation.

Welcome.

CROWLEY: Well, thank you.

KING: Last time on that side of the table.

CROWLEY: Yes. And I haven't rethought it, but maybe 10, 20 times since waking up this morning. It's -- I'm excited.

KING: You ready for the 4:00 a.m. wake-up call?

CROWLEY: No.

(LAUGHTER)

CROWLEY: My children used to tell me I was allergic to mornings because I'm sort of slow. But I'll try to get quicker. Maybe we just stay up on Saturday nights.

KING: And where are your children watching at this moment?

CROWLEY: Off in New Zealand. Hi, guys. Yeah. I just actually got -- I love -- don't we love twitters and all of that.

KING: We do.

CROWLEY: Just got a message from them saying, we're watching, mom.

KING: It's a fascinating time. I have loved the past year, and I have learned so much, because it has -- you will get new coffee mugs with your name on them pretty soon. And it's a special responsibility on a Sunday morning. I'm just interested in your thoughts. People are at home, you know, maybe they're in their pajamas. They're sitting around with their family, getting ready for a soccer game, but they invite you into their home at such a precious time, to learn and to listen a little bit.

CROWLEY: What I think is the -- where you have really gone down this road is, what are they thinking? We're not here for our own sort of internal, inside-the-Beltway conversation. It's supposed to be relevant, and I think that people do tune in. You're right, it's like not just an honor, it's sort of a heavy responsibility because you've got -- people have minimal amounts of time. You and I know that. And so, to get them to devote an hour, we hope we can, by saying, here is why we care, here is where this is headed, here is how it relates to your life, and that's what all of these -- your 50-state tour has been about. Where is the -- connecting the dots. I swear we will not use that phrase, but it's really true. It has to be about how does what goes on here and what goes on in the world affect you and what do you need to know about that? And an hour sounds like, wow, that's -- you know, that's a long time, but it's really not. And you've got to winnow down the relevance. KING: And Candy Crowley will be on this side of the table next Sunday. You haven't had much time to think about it, but obviously this program, some of it reflects who I am, and you want to make it a program that reflects who you are. Talk about that a little bit.

CROWLEY: Well, I think you're right. I think you can only be comfortable in something that is shaped around how you view journalism. I think you and I view journalism very much the same, as a huge responsibility to look at the totality of the picture.

But I think I'm fairly laid back, I think, although, again, my children might disagree with that at times. But I think I like, believe it or not, the poetry of politics. I like the kind of -- while I like politics and I like global things, because they relate so personally to everyone. And to be able to kind of bring that in and bring some poetry to their lives, to this show, I hope we can do that.

KING: And part of our Sunday conversation at CNN is not only taking a look at what the politicians are saying, but at how our business is doing. And in that regard, I want to bring in Howie Kurtz into our conversation as we turn things over to him with "Reliable Sources." Howie, we made a little news here this morning.

KURTZ: And do you see this as being an interesting transition to go from correspondent to the exulted post of Sunday morning?

CROWLEY: Actually, I view it as -- you look back and you think, I have been out there on the trail or around the world, wherever you've been, kind of prepares you for this, I think, because you can't sit here as John has shown and know things. You have to be other places because you tend to get tunnel vision. And I think, having spent decades talking to people about their lives and their worries and their questions, I hope I bring that to the table.

KURTZ: All right. Well, John King, we'll talk to you later. Congratulations on a great, great year. You visited all 50 states, you lived up to that promise.